Archive for February, 2008

In the morning Aisha De Sequeira gave a cool talk summarizing the worldwide microfinance industry. Microfinance institutions (MFIs) are banks that require capital (equity/debt financing) like any other business, which they use in turn lend to their “clients” in small amounts of $1000 or so. Based on projected growth plans of these MFIs in the next 5-10 years, Morgan Stanley estimates that their total capital needs will be $280B, but in actuality may remain as low as $20B – what to do about the gap in order to service the needs of end users? (that’s 500 million people according to Premal Shah at Kiva).

Aisha says MFIs can be categorized into Tier 1 (10%) which are profitable, and Tier 2 (90%) which are not profitable but most (or all) have business plans to become profitable. In afternoon sessions they were even talking about some MFIs going IPO. Profitability for 1st gen MFIs tooks 13 years, 2nd gen took 9 years, and 3rd generation are becoming profitable in as short as 4 years. The less mature MFIs usually get funded by organizations out of social responsibility, and the more mature MFIs can access commercial capital markets – they represent a diversified asset compared to other classes of investments. In funding MFIs, there is a tradeoff between absolute returns versus social responsibility – transparency allows people to make that evaluation.

Had a few hallway/lunch conversations. Professor James Austin (HBS) helped me understand that there may be a difference between urban and rural microfinance, but information on types of the types of businesses that are funded is probably not readily available yet – the major source of information/feedback is simply whether the loans get repaid (or not). Talking afterwards to Abid Safaffe, CEO of the Kashf Foundation (an MFI based on Lahore, Pakistan) whose operations are growing at 60-80% year on year, she says they see a “higher cost of operations” in rural areas due to distance and organizational hurdles and that most of their rural clients are farm-related (animals and agriculture). The urban clients (70%) are easier to serve and they are mostly “selling small stuff.” Also spoke to Asphina Skihauli — a loan officer from a South African MFI called Women’s Development Bank (WDB) that is purely rural focused. They pointed out that most of the clients are illiterate, start off in farm opportunities (like animals or selling vegetables), then after seeing success they move onto more profitable things like sewing, artifacts, manufacturing pottery or wooden chairs, all based on ideas they come up with which the bank then supports. WDB provides education for free.

At dinner one of the people I met expressed skepticism in the claims about microfinance. He thought that while there were lots of success stories and cases,

there is not a lot of data to support microfinance as being diversified asset class yet.

repayment rates are really so high as being reported due to refinancing by the MFI (instead of allowing client to default)

most of the profitable MFIs are in urban microfinance, leaving the unprofitable rural operations to NGOs and non-profits

In her presentation, Roshaneh Zafar the President/founder of Kashf (means “miracle”) cited Yunis’ call to action to get started several years ago – “if you fail blame me.”

In another talk I heard that Mexico has 106 mllion people of which 45% live on less than $2/day – in aggregate does not appear a whole lot different than India. Microfinance penetration in Mexico has been only 7%. Similarly Pakistan is 160 million people, 80% of them live on less than $2 per day, and microfinance penetration is 6-8%.

Yesterday I went to the talk by Premal Shah about www.kiva.org which he calls the “Ebay for microfinance.” It was at Zerox PARC. Thanks to Chari for giving me a heads up about this. They get lots of press and also see a recent NY Times article about them.

Kiva is a nonprofit website and clearing house that enables Internet users (lenders) to give 0% (interest-free) loans to specific individual or small-group “entrepreneurs” (borrowers) in developing countries in Africa, South America, Eastern Europe, and Asia. They work with 85 field partners from 40 countries, called microfinance institutions (MFI), who post/vet entrepreneur profiles which are in turn selected by Internet users for personal loans. One of the biggest advantages of Kiva is end-to-end transparency — each lender can “see” who which borrower they are lending to, track their progress through journal updates, and see when the loan is being repayed. See a blog post by Guy Kawasaki that explains their fee per transaction business model — $2.50 voluntary fee that lenders pay when checking out their “shopping cart.”

Yunis was first 30 years ago, and today there are 10,000 MFIs worldwide. He estimates there are 500M people needing loans like this, and only 100M have been reached through traditional microfinance to-date. Access to capital is still a bottleneck he says. Note: Kiva is prevented from operating in India due to their bank regulations.

Kiva Statistics. Kiva is 3 years old, so far $20M loaned by Q1 08 in 3 years since inception,. Observing parabolic quarter on quarter growth in loans and expect to have loaned $250M to $1B in five years surpassing efforts of microfinance initiatives major banks like Citibank ($100M).

The Kiva model:

Internet user (a lender, social investor)

–> Kiva (online marketplace)

–> Local Field Partner (Microfinance Institution)

–> Developing World Entrepreneur (the borrower)

Each Kiva lender has given on average 2.2 loans — $25 max limited by Kiva. Over the 20-30,000 people visit the site daily, and 3% end up giving loans. Each borrower is usually funded by 15-20 lenders on average — typically in the range of $1000 total loan size. The lenders usually sign up within a day of a loan request being posted for an entrepreneur. In some war torn or crisis areas like Iraq of Afghanistan, the lenders sign up in just a few hours.

The lenders (social investor) rationale is that Kiva is transparent (know where it goes), sustainable (if repaid, money can be lent to someone else), affordable ($25 to change someone’s life), and unique (“I love microfinance, I want to participate”). For the microfinance institution, Kiva offers a low interest US dollar capital, no liability, flexible repayment terms, and financial assistance + incentives for transparency.100% of loan funds go directly to the borrowers.

Kiva checks out (verify) the MFIs and the MFIs in turn check out the borrowers. The MFI charges 20% interest rate to cover distribution costs, and they bear currency ris as well when converting from US dollars to local currency and back during repayment period. In the future Premal hopes they can establish credit histories for individuals and bypass this intermediate layer completely. Kiva uses random sampling to audit and check on the MFIs for fraud.

Unlike traditional microfinance where borrowers are organized into groups who are accountable to each other, social accountability is created via the Internet. Borrowers’ profiles are made visible on the Internet, and is therefore visible online to locals who watch each other at Internet kiosks/cafes.

Capital. Internet users are willing to bear greater risk than banks probably due to the “personal connection.” People don’t want (need) to lend with interest, whereas banks have to when they are working with MFIs.

Operating Principles.“Unreliable credit is OK, but unreliable data is not OK.” Each lender gets a “portfolio” of people who they lend to, much like a stock portfolio on Etrade. Loans in this model create a “persistent tie” between the people across the world with journal updates. The accountability is simple. If you are getting repaid, something is working. If you don’t get repayed, something is not working. MFIs report repayment rates of 99.7% but Premal believes that’s skewed to report better than actual results because the MFIs don’t want to discourage Kiva. He believes the actual repayment rate is over 90%. There is a “Risk & Due Diligence Center” on the website.

Diversification. I asked what types of different activities and market opportunities are being funded, epecially outside agriculture. He said he doesn’t know for sure, but says that agricultural opportunities are the dominant activity being funded. In addition, there appears to be a slight lender bias. For example, the most popular kind of loan that gets funded by lenders is African female farmer, and the least popular is an Eastern European male taxi driver. He questions whether or not that is economically rational, but says that’s what it is right now. In 3Q 2008 they plan to open up APIs so researchers can download and analyze the loan data from their website to gain further insights.

Organization. Kiva.org is 25 people and operates on very low overhead thanks to cooperation and donations from several silicon valley companies. For example PayPal gives free payment processing. Google offers free AdWords traffic.